Real estate: One more conversation….
Subra…I bought this house for Rs. 42 lakhs about 8 years ago now it is worth Rs. 80 lakhs…It has almost doubled.
So Subra using your Rule of 72…I have got a 9% return..this is fantastic is it not? In the share market I could not have got this much, right?
I said…not so quick my friend…let us see how much you really paid.
He said:
Down payment, registration, interiors (not realisable in case of a sale), society entry charges, brokerage, = Rs. 5 lakhs
INTEREST PAID ON THE BORROWED AMOUNT: 18 LAKHS
Total cost = Rs. 65 lakhs.
Today it is worth Rs. 80 lakhs.
So the return is to be calculated on Rs. 65 lakhs…AND NOT ON Rs. 42 (which is what the broker told you when he showed it to you)
Are the returns good?
Frankly does it matter? you are living in it, right?
Your wife and children are happy with the location, right?
Chill man. Just do not be a victim of Innumeracy.
Jayant
Best thing is to ignore the house one is living from asset list. The house where one is living is necessity. Whatever current price of the house is just feel good factor. Those people who luckily bought houses in early 2000 (2001-2004) won’t be able to buy their own house again !
subra
they will be. Given the growth of the economy at 5,and then 4%…and consequent loss of jobs, do not worry the same jobs will be available as a distress sale. Happening in Ahmedabad…Pune cannot be too far behind, can it?
Just joking, but there is no one way street in a commodity market like steel and cement….
akshat
Subra, your comment has a typo ->”same jobs” or “same houses” ? On a pedantic note, how does one account for the interest paid while calculating returns and where does money saved from rent fit in the picture ?
subra
Excel, use IRR
Mira D
That chill factor is the ONLY way I can justify my N. Bby 1BHK. 🙂
Anurag
Loved the use of this word “Innumeracy” 🙂
aditya
@Anurag
its a classic book by John Allen paulos
Subra: What is the economics of Housing bodies? Like DDA or ones in mUMbai/Pune?
Praveen
What about the RENT saved by living in own house
Suresh
I think including the interest amount on calculating the return is not correct.
Say for example, I borrow a loan Rs.10,000/- at 8% p.a and put it in Fixed Deposit at 10% p.a.
At the end of the year, I will get a maturity amount of 11,000 from the fixed deposit and I repay the loan of 10,8000(10,000 loan+800 interest).
So I got a net amount of Rs.200/-. Could we say the Fixed deposit returned 2% ?
No the fixed deposit return is 10%, but my profit is 2%.
I enjoy reading your blog. Keep up the good work.
Regards,
Suresh.G
Kaushik
@Suresh, you make the profit of 2% only if you do not pay income tax on the interest earned.
C.J.GOPINATH
Boss, which bank will lend at 8%,when FD interest in at 10%
sanjay
Dude, why are you including the interest part at all?
either include the cost at 42 lacs at the beginning or take time value of all installments (principal + interest) as cost… hope you be more careful in your analysis in future